The Importance of Calculating After-Tax Returns

The Importance of Calculating After-Tax Returns

via My Money Blog:

Gus Sauter, former CIO at Vanguard, talks about the need to focus on after-tax investment returns in an interview with the WSJ (found via Abnormal Returns). He answers the question What’s your most important tax advice for mutual-fund investors?:

For equity investors with a long time horizon, it is important to search for funds that have low annual distributions of capital gains. Grinding through the math, it turns out that a fund that realizes and distributes most of its capital gains annually would have to outperform a fund that distributes minimal capital gains by as much as 2% per year in order to provide the same long-term, after-tax return. Funds that have lower turnover are a pretty good place to start looking for low capital-gain distributions. Index funds are an obvious candidate.

For fixed-income investors in higher tax brackets, municipal-bond funds can be an attractive alternative to taxable bond funds.

In 2013, many successful active funds that trade frequently (high turnover) distributed sizable capital gains. Resources like Morningstar.com can provide information about turnover ratio and after-tax returns for specific funds.

Here are the 2013 capital gains distributions for all Vanguard funds. Both Vanguard’s Total US Stock and Total International Stock funds distributed zero capital gains for 2013. For your own holdings, you can check your tax statements to compare the relative size of the capital gains with the share price (NAV).

1994-2013 Callan Periodic Table of Investment Returns

1994-2013 Callan Periodic Table of Investment Returns

via My Money Blog:

Reader Ben shared this in the comments, and I think it deserves a separate mention. Every year, investment consultant firm Callan Associates updates a neat visual representation of the relative performance of 8 major asset classes over the last 20 years. You can find the most recent one below (click to view PDF), which covers 1994 to 2013. Each year, the best performing asset class is listed at the top, and it sorts downward until you have the worst performing asset. You can find previous versions here.

You can try to find some patterns, but I doubt you’ll find anything significant. Sometimes an asset class has a hot streak that last a few years, and other times an asset class is on top one year and bottom the next. Most recently, Emerging markets equities were on top in 2012, and bottom in 2013.

Also, while the table compares relative performance, you can also note that absolute performance changes all the time as well. In 2013 the best asset class returned +43% while the worst asset class returned -2%. Contrast this with 2008, when the best asset class returned +5% while the worst asset class returned -53%. Sometimes you just can’t lose, and other times you just can’t win.

So I won’t bother predicting what will happen in 2014, and will instead continue owning multiple, less-correlating asset classes using low-cost passive investments. Oh, and I make sure to rebalance them regularly.

Stock-Picking Mutual Funds Still Lacking in Persistence

Stock-Picking Mutual Funds Still Lacking in Persistence

via My Money Blog:

It is very tempting to invest in an actively-managed mutual fund that advertises above-average historical returns. Why would you bother investing in the ones with below-average returns? However, there’s something behind the whole “past performance does not guarantee future results” fine print. While there will always be funds that outperform looking backwards, that fact just doesn’t reveal very much about the future.

Index provider Standard & Poor’s publishes something called the S&P Persistence Scorecard twice a year, which examines the persistence of mutual fund performance over consecutive and overlapping time periods. By using quartiles, relative performance is compared, not absolute performance. Do the funds that had top returns in the past continue to have top returns?

The most recent December 2013 study [pdf] reaffirms the general conclusions of many other similar studies on persistence of actively-managed mutual fund performance, namely that it is often nowhere to be found when compared with random chance.

Very few funds can consistently stay at the top. Our studies show that as time horizons widen,the performance persistence of top quartile managers declines. Of the 692 funds that were in the top quartile as of September 2011, only 7.23% managed to stay in the top quartile at the end of September 2013. Similarly, 5.28% of the large-cap funds, 10.31% of the mid-cap funds and 8.15% of the small-cap funds remain in the top quartile.

For the three years ended September 2013, 19.25% of large-cap funds, 20.1% of mid-cap funds and 26.8% of small-cap funds maintained a top-half ranking over three consecutive 12-month periods. It should be noted that random expectations would suggest a rate of 25% and small-cap funds was the only category to exceed the repeat rate.

A good analogy I’ve read is that you don’t drive by only looking at your rearview mirror.

More: Barron’s, Rick Ferri/Forbes

Closed last EU short at 1.3764, +91 pips

Closed last EU short at 1.3764, +91 pipsDecember 27, 201317.12 gmtI’ve decided to lighten the risk ahead of the week-end and at the same time take profit, which will make my returns for December look good Closed EURUSD short from 1.3855 at 1.3764, +91 pips.There is a possibility that EU may show strength on Monday morning, so I want to be ready for that.About these adsShare this:Email Print Facebook Google RelatedFrom → Trades

via Zen and the Art of FX Trading:

17.12 gmt

I’ve decided to lighten the risk ahead of the week-end and at the same time take profit, which will make my returns for December look good

Closed EURUSD short from 1.3855 at 1.3764, +91 pips.

There is a possibility that EU may show strength on Monday morning, so I want to be ready for that.

For more info: Closed last EU short at 1.3764, +91 pips

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Closed last EU short at 1.3764, +91 pips

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